The final quarter of 2016 has started on a quiet note. In the last nine months, the broader market remained fitful thanks to oil price volatility, global growth issues, Brexit referendum and indecision of the Fed regarding rate hike. Still, markets ushered in gains occasionally on dovish central banks in the developed world.
Any good news from the oil patch and favorable U.S. economic data points boosted investors’ sentiment sporadically. All these mixed forces have helped (SPY - ETF report) gain over 7.7%, DIA add over 7.5% and (QQQ - ETF report) move higher by about 4.7% in the first nine months.
Against such a backdrop, the stage has been set for Q4. Let’s take a look at the key events that are coming up and the winning strategies to deal with each event.
Fed Rate Hike
The odds of a rate hike in December spiked after the Fed stayed put but maintained an upbeat outlook on the U.S. economyin its September meeting. Though Fed chief Yellen indicated no "fixed timetable" for a hike, market watchers expect one in December as the November meeting will happen just before the presidential election – a highly sensitive time for a rate hike. Solid manufacturing and service sector readings and upwardly revised Q2 GDP data (up 1.4%) fueled the rate hike bet further.
Sectors to Hit & Flop: Investors downplaying Wells Fargo's recent sales scandal or questions over the financial health of Deutsche Bank may consider investing in financial ETFs like Financial Select Sector SPDR ETF (XLF - ETF report) or PowerShares KBW Bank ETF (KBWB) as these stocks perform better in a rising rate environment (read: Financial ETFs in Focus on Wells Fargo's Sales Scandal).
Plus, consumer discretionary ETFs like Consumer Discret Select Sector SPDR ETF (XLY - ETF report) and tech ETFs like Technology Select Sector SPDR ETF (XLK - ETF report) also perform well in the early rate hike cycle as per historical standard. This is because a growing economy normally helps in creating the wealth effect, which leads consumers to spend more as their asset value rises.
On the other hand, high-yielding sectors will likely falter in a rising rate environment. So, Utilities Select Sector SPDR ETF (XLU - ETF report) and Vanguard REIT ETF (VNQ - ETF report) could be at risk. Having said this, we would like to note that these are just initial blows and after a few upheavals, things should settle down. Investors dreading interest rate hike may also try out this rate-restricted ETF PowerShares S&P 500 ex-Rate Sensitive Low Volatility ETF XRLV. Fidelity Dividend ETF for Rising Rates FDRR can also be a good pick right now.
Where Will Bond Markets Go?
With Fed hike concerns doing rounds and rates rising by leaps and bounds, bond ETFs started to underperform at the onset of Q4. Several niche bond ETFs may come to investors' rescue in this situation.
Floating rate bond ETFs like iShares Floating Rate Bond (FLOT), bank loan ETFs like Highland/iBoxx Senior Loan ETF SNLN, inverse Treasury ETFs like Direxion Daily 20+ Year Treasury Bear 3X ETF (TMV) or Sit Rising Rate ETF (RISE) and negative duration bond ETFs like WisdomTree Barclays US Aggregate Bond Negative Duration Bond ETF (AGND) are some of the funds to look out for (read: Higher Interest Rates Are Coming, How Do Investors Prepare?)
The presidential election is slated on November 8 and the gap between Democratic candidate Hillary Clinton and Republican candidate Donald Trump is close. As per the source, Clinton had a 48.4% chance of winning as of October 6, 2016 while Trump had 41.8% chances. Since the wind is in favor of Clinton right now, especially after the apparent win in the first presidential debate, a few Clinton-friendly investments deserve a look.
We suggest medical devices ETFs like iShares US Medical Devices ETF (IHI) as Clinton is viewed as the successor of Obamacare policy. However, thanks to her constant exasperation about the price gouging issues in the pharma sector, edgy investors may stay away from pharma and biotech ETFs, though the biotech space is also marching higher on increasing mergers and acquisitions.
Other corners of the market that will benefit from a Clinton presidency are clean energy ETFs like PowerShares WilderHill Clean Energy Portfolio ETF (PBW) and defense ETF like iShares US Aerospace & Defense (ITA) (read: Clinton Apparently Won First Debate: ETFs in Focus).
As we all know, Q4 is known for its festive events. As loads of retail sales boosting events – Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas – fall in this quarter, all eyes must be on the performance of retailers.
Research agency Deloitte expects holiday spending to rise 3.6–4% from this November through January, in line with 2015. On the other hand, Kantar Retail expects a 3.8% jump in spending, higher than the 3.4% gain seen in the last holiday season. Kantar Retail also noted that online sales will surge about 16%.
So, one can follow Amplify Online Retail ETF (IBUY), First Trust Dow Jones Internet ETF FDN and VanEck Vectors Retail ETF (RTH - ETF report) for gains (read: 4 Best ETFs to Buy for Q4).
Oil Output Curb in November?
A surprise OPEC move in September that hints at capping its oil output for the first time in eight years in the OPEC’s November meeting will keep oil investors on their toes. Chances are high that oil will remain steady in the meantime barring any sudden setbacks, but any confusion in reaching the definitive agreement may drag oil down severely. Plus, analysts are still unsure if a proposed output cut will be enough to bring oil out of the muted price range. So, oil ETFs including United States Oil (USO - ETF report) and United States Brent Oil (BNO - ETF report) should be in focus (read: If Oil Continues to Soar, These 7 ETFs May Fall).
Volatility to Hold Reins?
With so many key factors lined up for Q4, wild market swings are expected. Investors can deal with this in various ways. The first way out that comes to mind is the low volatility ETFs like The Legg Mason Low Volatility High Dividend ETF (LVHD) and PowerShares S&P SmallCap Low Volatility Portfolio ETF (XSLV). Defensive ETFs like U.S Market Neutral Anti-Beta Fund BTAL and AdvisorShares Active Bear ETF HDGE should also help.
However, there is another option in queue – the volatility ETF basket including the likes of C-Tracks on Citi Volatility Index ETN CVOL and ProShares VIX Short-Term Futures (VIXY - ETF report) . As the name suggests, volatility products are pretty erratic in nature and thus suit investors with a short-term notion.
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